Mumbai: S. Nandakumar is careful with his daily spending these days. The chief executive of medical devices start-up Perfint Engineering Services Pvt. Ltd has cut down travelling to other cities to a bare minimum, pared marketing budgets and moved the company’s labs from Mysore to Chennai, its sales headquarters, to cut costs.
The firm, founded by a team of former executives of General Electric Co.’s India arm, raised $3.5 million from IDG Ventures India and Erasmic Venture Fund (now Accel India) last December.
“They have not asked for any business change, (but) we have been asked to be careful about our daily spending and accelerate revenue activity,” says Nandakumar.
This sums up what venture capitalists in India are asking their portfolio companies to do to survive the economic slowdown—tighten belts, focus on revenue generation and hold fund-rasing unless absolutely necessary.
As valuations decline and markets get tougher, entrepreneurs are walking the extra mile to stretch the rupee as much as possible.
Most early stage ventures do not have positive cash flows, and many may not even be generating revenues yet. “Companies are looking at building business fundamentals rather than experimentation. Those with aggressive, multi-pronged approach to growth will prune their plans,” predicts Kanwaljit Singh, managing director, Helion Venture Partners.
Earlier this month, venture firm Sequoia Capital painted a gloomy future to its portfolio firms in the US in a presentation that began with the image of a tombstone engraved “R.I.P. Good Times”. In the past few weeks, Internet firms ranging from Yahoo! Inc. to smaller teams such as Mahalo.com Inc. and Imeem Inc. have announced layoffs of between 10% and 25% of their workforce. Silicon Valley, California, the hub of entrepreneurial activity in the US, has been hit by the recession.
Feeling the pinch
Indian firms may not be affected by the US slowdown directly but they will feel the pinch in other ways. Venture funding is expected to slow further as VCs turn cautious in the downturn and focus more on helping existing portfolio companies do well.
Not only do many US-based venture firms such as Clearstone Venture Partners, Canaan Partners and Draper Fisher Jurvetson invest in India from global funds, but close to 90% of dedicated India funds raised by venture capitalists here comes from limited partnerships (institutions that back equity funds) in the US.
“This is not a good environment to raise money,” says Tim Draper, managing director, DFJ, who on his recent visit to India advised portfolio firms to tighten expenses. Besides funding, business, too, will be impacted depending on the industry and target market.
Mumbai-based business analytics firm MAIA Intelligence says it is in discussions with 14 small and medium-sized companies in IT, financial services and manufacturing to develop tools to increase profitability and cut costs. “The focus is on profitability more than simply turnover, and measuring marketing efforts to see what’s working and what can be cut,” says MAIA’s chief executive Sanjay Mehta.
Companies are making the money last longer in two ways—by cutting back on operational expenses and focusing on ways to generate faster revenues. To speed up cash flow, IDG’s portfolio firms are spending 50-100% more time with existing and potential clients than before.
“Inefficiencies in the sales cycle may be manageable in a growing market because you have more potential customers but, in a downturn, you have to ensure collections happen faster,” says Sudheer Sethi, chairman and managing director, IDG Ventures.
The firm has invested in eight companies out of its $150 million India fund, including retail analytics firm Manthan Software Services Pvt. Ltd and online ad network Ozone Media Solutions Pvt. Ltd.
Strategies that do not lead to immediate revenue generation are on the back burner. “Earlier, a social media aspect to travel would be nice to have. But it won’t necessarily bring revenues in or change cost of customer acquisition, so now it will be less of a priority,” says Sandeep Murthy, who manages dual roles as chairman of online travel booking site Cleartrip Travel Services Pvt. Ltd and partner with KPCB and Sherpalo Ventures.
Cleartrip has raised at least $30 million in three rounds of funding in as many years. Over the past five months, it has expanded from domestic air travel bookings to international bookings, railway ticketing and hotel bookings to create more revenue channels.
Expenses under scrutiny
Operationally, office rentals top the list of expenses under scrutiny. “One of the first areas we evaluated was the real estate expense, but we’d done a good job with it,” says Gaurav Mishra, co-founder of local search engine Guruji.com Software Pvt. Ltd.
Its team, which raised $7 million from Sequoia Capital India in 2006, held detailed discussions with its board members to measure return on investments (RoI) on all its activities, including hiring and marketing.
Other start-ups are planning to share office space to save costs. Sethi of IDG says its portfolio companies are sharing offices in Delhi, Mumbai and Bangalore, but declines to name them.
Marketing budgets, too, have come under the axe. “It will be a lot more performance-based, such as referral programmes with incentives, rather than the conventional funnel approach that you reach out to a lot of people (hoping) some of them turn into customers,” says Murthy.
Online photo printing site ZoomIn Online (India) Pvt. Ltd, a portfolio company, is focusing on such marketing tactics to keep expenses in check. And while there is no freeze on hiring, it is more circumspect and tied in with RoI.
In the long run, start-ups are hopeful the Indian markets will bounce back faster than the US. While the uncertainty lasts, they will tread carefully.
Deepti Chaudhary contributed to this story.